Option #1-Purchase a new compactor for $30,000. The new compactor is expected to

Question

Option #1-Purchase a new compactor for $30,000. The new compactor is expected to last six years and have a salvage value of $5,000. Option #2-Lease a new compactor for $6,000 per year, payable at the beginning of each year. This option has an indefinite lifespan. Option #3-Purchase a used compactor for $16,800. The used compactor is expected to last three years with no salvage value. if the annual interest rate is 5%; a. what is the annual cost of option #1? b, what is the annual cost of option #2? c. what is the annual cost of option #3? d. Which alternative should be selected? 8,

Explanation / Answer

1.

Net present cost of Option 1=30000-6000/1.05^6=25522.70762

Annual cost of option 1=25522.7062*5%/(1-1/1.05^6)=5028.418955

2.

Annual cost of Option 2=6000*1.05=6300

3.

Annual cost of option 3=16800*5%/(1-1/1.05^3)=6169.103886

4.

Choose Option 1 as it has least annual cost

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